Setting the price is one of the more complex activities we undertake when launching a new product or service. As a starting point to evaluate pricing, we tend to triangulate three variables: cost, competition (price), and contribution. These three dimensions alone are not sufficient, however, and each by itself is limiting. Product development & management research suggests that many companies struggle with pricing. Even best-in-class companies are stuck in the 3-dimension mindset and once in the market, raising price is not easy. Price, in fact, is a way to innovate and getting it right has never been more important.
But, we know there is a fourth dimension that informs value-based pricing and the truth lies in what customers are willing to pay. Understanding your competitors’ customers will help you uncover answers to the following questions:
- If your product or service is superior to the competition and potential customers view it that way, can you charge a premium?
- Do you know where you stand, beyond price, relative to your competitors’ products?
- How are you positioned against alternatives and what other information might help you set the right price?
For years, companies have been telling us that they collect and monitor competitive pricing. When we review their data, it is usually public information available from published price sheets and their competitors’ websites. Real competitive pricing is not being collected at the customer level. If companies had the discipline to investigate what their competitors’ customers actually pay, they would find a treasure trove of information to validate the price/value mix and help inform other key marketing and product management decisions. How you collect this information ethically and where you start are two key questions every company should ask before beginning. How you use this information is where the power lies. Customers can value the benefits of a product or service subjectively and this may differ by company and sometimes even by the corporate purchaser. Understanding how your competitors’ customers measure value and utility will provide you with insight to establish better pricing and promote your product or service to win deals and grow revenue.